Schultz v. Ginsburg, No. 341, 2008 (Del. Feb. 3, 2009)

In this case, the Supreme Court approved en banc the Court of Chancery’s approval of an allocation plan awarding funds in connection with a settlement of derivative and direct claims.

In June and August of 2005, the Philadelphia Stock Exchange (“PHLX”) entered into a series of

dilutive transactions (the “Transactions”) in which six Strategic Investors acquired (1) 45% of PHLX’s equity, and (2) warrants for an additional 44.4% of PHLX’s equity at a later date. As a result of the first part of the Transactions, PHLX reduced its original stakeholders’ control to 50.2%, and the book value of PHLX stock fell from $949.18 to $172.64 per share. One of the stakeholders, Chuck Ginsburg (“Ginsburg”), filed suit seeking rescission of the Transactions or, in the alternative, rescissory damages. After the Court of Chancery denied his motion to expedite the case and to enjoin the Strategic Investors from exercising their warrants, he amended his complaint to add an allegation that the PHLX board of directors (the “Board”) had violated the company’s Certificate of Incorporation (the“Charter Violation claim”).

In the litigation that followed, Ginsburg was appointed the representative of a class of plaintiffs including all PHLX Class A common stockholders and their transferees or successors in interest during the class period. The parties agreed to a final settlement on June 20, 2007, part of which provided that PHLX agreed to pay $17.1 million into a settlement fund. After the Chancery Court approved the settlement, Ginsburg organized a class meeting to discuss the allocation of the settlement proceeds among different groups of plaintiffs within the class, depending on when they had held stock during the class period. The groups included Sellers, who had a claim based on the dilutive effect of the Transaction (the “Economic Dilution claim”), Buyers, who had the Charter Violation claim, and Continuous Holders, who had held PHLX Class A stock throughout the class period. Under the allocation plan, Continuous Holders would recover 100% per share, Buyers would recover 60% or 80% per share depending on when they had acquired their stock, and Sellers would recover 20% or 40% per share depending on when they had sold their stock. After a hearing on the merits of the allocation plan, the Court of Chancery approved the plan, concluding it was substantially and procedurally fair, reasonable, adequate, and equitable.

In this decision on the objections of certain sellers (the “Objector Sellers”) to the allocation plan, the Supreme Court applied an abuse of discretion standard to the Court of Chancery’s decision. The Court first concluded that the Court or Chancery had not abused its discretion by approving the allocation of proceeds between Buyers and Sellers. In determining how to allocate the settlement proceeds between the Sellers and the Buyers, Ginsburg, an unbiased Continuous Holder, had weighed the relative merits and likelihoods of recovery of the Charter Violation claim and the Economic Dilution claim. Ginsburg concluded that the Buyers’ Charter Violation claim was a direct contract claim relating to PHLX’s Certificate of Incorporation with a relatively high likelihood of success, whereas the Sellers’ Economic Dilution claim was likely derivative, and thus any recovery resulting from it would not go to the stockholders.

Accordingly, the Buyers were entitled to a greater proportion of the settlement proceeds than were the Sellers. The Court went on to reject the Objector Sellers’ argument that the Buyers were not entitled to recover money from the settlement fund because they had not suffered “actual damages,” finding that the damages in this case were equitable rescissory damages rather than money damages. Next, the Court concluded that the Court of Chancery had not abused its discretion by declining to certify subclasses within the plaintiff class, finding that such decision was based on the thorough and unconflicted process of the unbiased representative. Finally, the Court approved the Court of Chancery’s decision denying attorneys’ fees to the Objector Sellers, finding that they had not conferred a benefit to the class.